As we have reported in our e-newsletter previously, the IRS created a special unit in 2009 to focus on examinations of tax returns of high net worth individuals. Coupled with the increasingly granular reporting now required in areas such as foreign financial interests, IRS’ goal was to obtain a more complete picture of all of the financial interests held by wealthy families and better assess compliance on a more timely basis.

These efforts have been driven in large part by the “tax gap” that has been getting some attention in recent years. The tax gap is simply defined as the total difference between the aggregate taxes owed by various types of taxpayers versus what has actually been collected. In 2006, the tax gap was determined to be $450 billion, most of which was due to the underreporting of various types of federal taxes. The largest shortfall came in the area of individual income taxes at $235 billion.

So what are we experiencing since the creation of this special unit? As recently reported in Bloomberg News, the IRS in 2011 audited 29.93% of taxpayers who reported more than $10 million of income. That compares to 18.38% in 2010 and 10.6% in 2009.

For taxpayers with adjusted gross incomes between $5 million and $10 million, the audit rate rose to 20.75% from 11.55%.

The report did not mention what these audits have yielded in terms of increased collections, but there is no denying that these measures are having an effect. For those of us who have been advising clients in this area for a long time now, seeing the IRS put a plan in place and execute with such speed is still a relatively new phenomenon. Yet, I fully expect the trend to continue. The only thing that continues to hamper IRS is lack of resources due to budget constraints.

We see it in our own practice. The audit activity has reached unprecedented levels in recent years and we believe the trend will continue. As a result, KLR has established our Tax Controversy Practice to focus on audit defense.

The take away? Playing audit roulette was never advisable, and now the odds are diminishing. If you are in need of assistance on tax matters either for the current or previous years, don’t hesitate to call us.

KLR’s tax professionals are CPA’s and attorneys who have specialized training and experience in all matters of Federal, State and Local Tax Issues. Their expertise in tax strategies for individuals and families includes everything from estate gift & trust services, voluntary disclosure issues, transfer pricing, M&A assistance, cost segregation studies and research & development tax credits.